Exact Ventures in the News: Rethinking Wireless Competition and the Need for Economies of Scale for 5G T-Mobile USA and Sprint

On April 29th, T-Mobile and Sprint – the third and fourth largest mobile operators in the United States – announced they would once again attempt to merge after regulators stymied previous attempts. And more recently, Vodafone announced on May 9th that it would be acquiring the cable assets of Liberty Global in Germany, Hungary, Romania and the Czech Republic. Both merges are about achieving larger scale in the distribution of content.

Generally, wireless operators have been adopting three strategies to regain profitability, relevance, and market power. They are:

(1) Merge, to gain economies of scale and recapture some market power

(2) Acquire exclusive content

(3) Transform their networks and business models to look more like over-the-top service providers

All three of these strategies are good and necessary developments for the wireless industry.

Consolidation in the United States would mean that the three remaining large operators support a population of 325 million. In China, the three national wireless operators support a population of 1.4 billion. While consumers in the U.S. pay considerably more per month for their wireless services and content, but as China’s economy shifts more toward consumption in the coming years, their APRU will likely trend upward.

Outside of the United States, Japan, Korea, and China, where there is a race to be the leader in 5G, many operators are struggling to understand how to profitably acquire new spectrum and invest in network infrastructure, which entails hundreds of thousands base stations and small cells, backhaul, and potentially scale a new core network to justify the investment in 5G.

Looking at the nature of competition in the wireless space, it should not be so narrowly defined as to look simply at wireless services. Instead, wireless services should be viewed as a medium for content distribution, where the value has shifted from distribution to content in the forms of Instagram, Netflix, FaceTime, Snapchat and YouTube, among others. That means that traditional voice and messaging services, once keys to measuring competitiveness and driving growth and profits, are now largely throw-in services.

Since much of the value is being generated outside of and on top of operator networks, those networks need additional scale to justify the continued investment needed to fuel the innovation that will occur on top of the distribution networks.

This dramatic shift in the value chain began with the iPhone, which was the first device and application ecosystem to leverage the capabilities of the mobile network. Prior to this, mobile operators had a good deal of control over the applications and service that ran on their network. These networks have enabled an enormous growth in value and wealth through the app ecosystem and over-the-top service providers.

There is a tremendous amount of technology and innovation that goes into wireless networks and devices. If we want that innovation to continue, then some further consolidation needs to occur.